Industrial Production and Industrial Production and Capacity UtilizationCapacity Utilization

By:By:

Elizabeth VelascoElizabeth Velasco

Sandra MartinezSandra Martinez

Industrial Production and Capacity Industrial Production and Capacity UtilizationUtilization

Published by: Board of Governors of the Published by: Board of Governors of the Federal Reserve SystemFederal Reserve System

Frequency: MonthlyFrequency: Monthly

Period Covered: prior monthPeriod Covered: prior month

Volatility: LowVolatility: Low

Market Significance: Medium/ModerateMarket Significance: Medium/Moderate

New Release on the Internet: New Release on the Internet: www.federalreserve.gov/releases/g17/currentwww.federalreserve.gov/releases/g17/current

What is it?What is it?

Records U.S. Industry’s output and its spare capacity.Records U.S. Industry’s output and its spare capacity.Industrial production index measures changes in Industrial production index measures changes in production between two different periods of time. It aims to production between two different periods of time. It aims to measure the average change in value of production.measure the average change in value of production.IP Index must reflect: IP Index must reflect:

- Variations in type and quality of the - Variations in type and quality of the commodities and of the input materials commodities and of the input materials

- Changes in stock of finished goods and goods - Changes in stock of finished goods and goods in progress in progress - Related services, such as assembling of - Related services, such as assembling of production units, mounting installation, repairs, production units, mounting installation, repairs,

planning, engineering. planning, engineering.

What is in the report?What is in the report?

The reports include hours worked in The reports include hours worked in factories (from employment data) and the factories (from employment data) and the amount of electric power consumed by amount of electric power consumed by business (from power supply companies).business (from power supply companies).IP data is presented in two formats:IP data is presented in two formats:– By type of product, such as consumer goods, By type of product, such as consumer goods,

business goods, intermediate goods, and business goods, intermediate goods, and materials.materials.

– Based on output by industry in broad, supply-Based on output by industry in broad, supply-side terms.side terms.

Why is it important?Why is it important?

IP covers nearly everything that is physically produced in IP covers nearly everything that is physically produced in the U.S. and includes cars, umbrellas, paper clips, the U.S. and includes cars, umbrellas, paper clips, electricity, and medical equipment.electricity, and medical equipment.It reacts fairly quickly to the ups and down of the It reacts fairly quickly to the ups and down of the business cycle.business cycle.It has a good track record of forecasting changes in It has a good track record of forecasting changes in manufacturing employment, average hourly earnings, manufacturing employment, average hourly earnings, and personal income. and personal income. Monthly survey on IP index allows identifying the turning Monthly survey on IP index allows identifying the turning points in economic growth at an early stage; also the points in economic growth at an early stage; also the timely IP index is one of the most important measures of timely IP index is one of the most important measures of economic activity.economic activity.

Keys to Interpreting the DataKeys to Interpreting the Data

Industrial production figures are seasonally Industrial production figures are seasonally adjusted in reports.adjusted in reports.Final numbers can occasionally be distorted Final numbers can occasionally be distorted because of bizarre weather, natural disasters, or because of bizarre weather, natural disasters, or a major strike by labor.a major strike by labor.To distinguish the true-underlying growth rate of To distinguish the true-underlying growth rate of IP in the economy, it is best to look at a three-IP in the economy, it is best to look at a three-month moving average.month moving average.The final revised index, three months later, vary The final revised index, three months later, vary by an average of just 0.3 percentage points.by an average of just 0.3 percentage points.

Latest ReleaseLatest Release

Industrial production decreased 0.2 percent in March after an Industrial production decreased 0.2 percent in March after an increase of 0.8 percent in February. Output in the manufacturing increase of 0.8 percent in February. Output in the manufacturing sector moved up 0.7 percent in March; the increase was led by sector moved up 0.7 percent in March; the increase was led by advances in the production of durable goods. advances in the production of durable goods.

Overall industrial production for March was 2.3 percent above its Overall industrial production for March was 2.3 percent above its year-earlier level.year-earlier level.

The output of utilities dropped 7.0 percent, largely reversing its The output of utilities dropped 7.0 percent, largely reversing its February jump of 7.6 percent, as temperatures swung from below February jump of 7.6 percent, as temperatures swung from below seasonal norms in February to above seasonal norms in March. seasonal norms in February to above seasonal norms in March.

The rate of capacity utilization for total industry fell 0.2 percentage The rate of capacity utilization for total industry fell 0.2 percentage point, to 81.4 percent, a level 0.4 percentage point above its 1972-point, to 81.4 percent, a level 0.4 percentage point above its 1972-2006 average. 2006 average.

Latest ReleaseLatest ReleaseIP and Capacity Utilization: SummaryIP and Capacity Utilization: Summary

Seasonally adjustedSeasonally adjusted

2002=1002002=100 Percent ChangePercent Change

IndustrialIndustrial

ProductionProduction

2006 2006 Dec.Dec.

2007 2007 Jan.Jan.

2007 2007 Feb.Feb.

2007 2007 Mar.Mar.

2006 2006 Dec.Dec.

2007 Jan.2007 Jan. 2007 2007

Feb.Feb.

20072007Mar.Mar.

Mar.’06 to Mar.’06 to Mar.’07Mar.’07

Total IndexTotal Index 112.2112.2 111.8111.8 112.7112.7 112.5112.5 .6.6 -.4-.4 .8.8 -.2-.2 2.32.3

Previous Previous EstimatesEstimates

112.4112.4 112.1112.1 113.1113.1 .8.8 -.3-.3 1.01.0

Major Market Major Market Groups Final Groups Final ProductsProducts

113.6113.6 113.0113.0 114.4114.4 114.0114.0 .7.7 -.5-.5 1.21.2 -.4-.4 3.33.3

Consumer Consumer GoodsGoods

107.8107.8 107.8107.8 109.6109.6 108.9108.9 .2.2 .0.0 1.61.6 -.6-.6 2.12.1

Business Business EquipmentEquipment

132.1132.1 129.2129.2 129.6129.6 130.6130.6 2.02.0 -2.2-2.2 .3.3 -.1-.1 .0.0

Nonindustrial Nonindustrial SuppliesSupplies

110.1110.1 109.6109.6 110.0110.0 109.9109.9 .5.5 -.4-.4 .6.6 .0.0 2.22.2

ConstructionConstruction 109.7109.7 108.6108.6 107.8107.8 109.0109.0 2.22.2 -1.0-1.0 -.8-.8 1.21.2 -2.1-2.1

MaterialsMaterials 111.7111.7 111.3111.3 111.9111.9 111.9111.9 .6.6 -.4-.4 .6.6 .0.0 2.22.2

Major Industry Major Industry Groups Groups ManufacturingManufacturing

114.4114.4 113.7113.7 113.8113.8 114.6114.6 1.11.1 -.6-.6 .1.1 .7.7 2.62.6

Previous Previous EstimatesEstimates

114.4114.4 113.9113.9 114.3114.3 1.01.0 -.5-.5 .4.4

MiningMining 102.5102.5 100.9100.9 101.2101.2 101.3101.3 1.81.8 -1.6-1.6 .3.3 .1.1 2.72.7

UtilitiesUtilities 102.5102.5 105.0105.0 113.0113.0 105.1105.1 -4.1-4.1 2.42.4 7.67.6 -7.0-7.0 -.4-.4

Historical DataHistorical Data

Data AnalysisData Analysis

Based on the information from the Based on the information from the indicator, we conclude:indicator, we conclude:

-Industrial Production increased by 2.3% -Industrial Production increased by 2.3% compared to last year’s levelcompared to last year’s level

-Industrial Production is very close to 3% -Industrial Production is very close to 3% of potential GDP (3.5-4%)of potential GDP (3.5-4%)

- The Federal Reserve should not be - The Federal Reserve should not be concerned about economic growthconcerned about economic growth